Disappearing defendants versus judgment-proof injurers

In this paper we analyse two ways in which liability can be reduced: caps (the judgment proof problem), and proportional reductions (the disappearing defendant problem). We show that these two problems have different incentive effects and hence yield dissimilar levels of social welfare. Moreover, when they occur simultaneously they may have offsetting effects. We also show that the negligence rule with cause-in-fact may yield lower (rather than higher) levels of social welfare than strict liability. Finally, we analyse the optimal setting of the negligence standard. Our model encompasses different precaution technologies as well as monetary v. non-monetary precautions.